BMI has lowered Romania's short-term political risk rating to 51 out of 100 as we believe that the risks to political stability in Romania are on the rise. Tightening fiscal policy in a bid to satisfy IMF conditions and the risks of a power struggle ahead of the November-December 2009 presidential election will be unpopular among the electorate. An aggressiveelection race could present key risks to political stability. Unemployment is increasing significantly. It is expected to have risen to 8.1% by the end of 2009 (from 5.8% in May 2009 and 4.9% in December 2008). Alongside that, the government is likely to overshoot the EU-required deficit target. We forecast a shortfall equivalent to 8.0% of GDP for 2009. The European Commission believes that Romania needs to introduce more reforms to meet EU norms. However, Romania fared considerably better in the last commission review, receiving praise for adopting new penal and civil codes, although the commission warned that it was waiting to see if these would be implemented effectively. Romania has increased the pace of reform since mid-2008 but there is still much room for improvement. The country was the second lowest out of the 27 EU members in Transparency International's most recent Corruption Perception Index in 2008.

The European Commission highlighted 16 areas which Romania needs further reforms. The operations of the judiciary continue to be a particular concern. In January 2009, the former Romanian Air Force chief of staff Constantin Croitoru and other senior staff were dismissed in connection with missing weapons. Although this signals lingering corruption and organised crime, it also demonstrates that the government is responding to it decisively. The UK has assisted Romania in its attempts to control corruption via the development of an anti-corruption agency based on British models. The collapse of domestic and foreign markets in the 1990s resulted in a drastic reduction in the size of the defence industry in Romania. In 1997, the government embarked on a programme of structural and macroeconomic stabilisation, with the aim of eventual EU membership and integration.

The pace of reform increased in December 2001 when the government introduced steps to radically restructure and rationalise the hitherto centrally run defence industry. This included initiating a long-term, exteINSve privatisation programme and modernising production facilities to manufacture equipment that meets NATO standards. During 2002 and 20 03, the government cut the number of defence industry employees from 45,000 to 18,500. In June 2004, the government announced plans to privatise RomArm, saying that privatisation would allow the repayment of the company's debts and that potential investors would have to guarantee the continuation of existing activities and maintain production facilities. The Romanian defence industry is capable of producing artillery, avionic equipment, helicopters, small calibre arms, communications systems, electro-optics and explosives. Defence expenditure is expected to fall from about 2% of GDP in 2005 to a little over 1% by 2013. Another influence shaping the Romanian defence industry is the competition in the arms market from Russia and China. In the long term, Russia's repositioning in the regional defence and security market may lead to Romania benefiting from more competition, with cheaper pricing or increasingly sophisticated defence systems. The Romanian defence industry remains relatively small compared with its European counterparts. Interest from overseas firms in the indigenous defence market is growing, especially since Romania joined the EU.

The anticipated better regulation, enhanced legal infrastructure and reduced corruption will make the Romanian defence industry an attractive investment opportunity for foreign firms. However, the Romanian government is being cautious about foreign firms' interest in the Romanian defence industry. According to the Institute of National Statistics (INS)'s flash estimate, the Romanian economy shrank by 8.8% year-on-year (y-o-y) in Q209, surpassing the 6.2% decline in the previous quarter and showing the downturn deepening during the second quarter. This makes Romania one of the worst positioned economies in Central and Eastern Europe (CEE). Recovery will look somewhat anaemic due to a protracted period of weak domestic demand, with financial stability still under threat in the meantime as global deleveraging continues apace. 

Fastmr; BMI
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